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A muddled geopolitical picture, stubborn inflation, a hawkish Federal Reserve, and a market with razor-thin leadership have been some of the major themes of 2023. However, despite the ever-present fear, uncertainty, and doubt, stocks have followed their typical pre-election year trajectory nearly to a T and are climbing the proverbial wall of worry. As I have repeatedly written about, the average year sees the S&P 500 Index trend higher from January to August before digesting gains and consolidating in a multi-month base structure. How accurate has seasonality been? On average, stocks bottom on October 27th. After bottoming on October 27th and gaining nearly 8% thus far in November, history is not only rhyming, but repeating itself completely.
Image Source: Zacks Investment Research
While stocks have come a long way in a short time, investors need to decide whether the recent strength is indicative of a bear market rally or a resumption of the current bull market. Below are five recent clues that suggest the latter:
Equity Put/Call Ratio Flashes Extreme Reading
Jason Goephert of SentimenTrader made the astute observation that equity options traders turned over more puts than calls last week. For the vast majority of trading days, calls option volume far exceeds put volume. However, when the opposite occurs, it’s worth noting. Over the past 25 years, similar readings (put turnover exceeding call turnover) have led to a higher two-month S&P 500 return in 26 out of 29 instances.
Image Source: SentimenTrader
New Highs are Exceeding New Lows
The New High-to-Low indicator measures the number of 52-week highs minus the number of 52-week lows in the market. New highs exceeding new lows are crucial for a sustained bull market because they reflect positive market breadth and broad-based strength. When the number of stocks reaching new highs outpaces those hitting new lows, it indicates widespread optimism and confidence among investors. This breadth suggests that the overall market is participating in the upward trend rather than being driven solely by a few high-performing stocks. For months, new lows have exceeded new highs, however; in the past few sessions, the trend has completely reversed.
Image Source: StockCharts.com
Stocks Retake Key Moving Averages
Because stocks tend to trend, moving averages are essential for investors to follow. Investor Jonah Lupton points out, “Just a couple weeks ago we had less than 14% of stocks in the S&P 500 Index ETF ((SPY - Free Report) ), Nasdaq 100 ETF ((QQQ - Free Report) ), and Russell 2000 Index ((IWM - Free Report) ) above their 50-day moving average. Now we have 67% of SPY, 72% of QQQ, and 61% of IWM above their 50-day moving average.”
Small Caps Explode on Massive Volume
On November 14th, the Russell 2000 index soared by 5.5% in volume more than double the norm. The magnitude of the price move coupled with heavy volume indicates a market that has bottomed and is being fueled by heavy institutional accumulation.
Image Source: TradingView
Inflation is Tamed
Earlier this week, a Bank of America ((BAC - Free Report) ) analyst wrote, “We now think the hiking cycle is over after a benign CPI report. The Fed will probably try to leave the door open for more hikes next year at its December meeting, but there are diminishing returns to hawkish rhetoric when its policy choice leans dovish. We think that it would take a meaningful re-acceleration in inflation for the Fed to hike next year.” The CME FedWatch Tool echoes this sentiment and gives it a 99.7% chance the Fed will not hike for the remainder of 2023. As the old Wall Street adage warns, “Don’t fight the fed!”
Image Source: Chicago Mercantile Exchange
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5 Signals Point to a Sustained Bull Market
A muddled geopolitical picture, stubborn inflation, a hawkish Federal Reserve, and a market with razor-thin leadership have been some of the major themes of 2023. However, despite the ever-present fear, uncertainty, and doubt, stocks have followed their typical pre-election year trajectory nearly to a T and are climbing the proverbial wall of worry. As I have repeatedly written about, the average year sees the S&P 500 Index trend higher from January to August before digesting gains and consolidating in a multi-month base structure. How accurate has seasonality been? On average, stocks bottom on October 27th. After bottoming on October 27th and gaining nearly 8% thus far in November, history is not only rhyming, but repeating itself completely.
Image Source: Zacks Investment Research
While stocks have come a long way in a short time, investors need to decide whether the recent strength is indicative of a bear market rally or a resumption of the current bull market. Below are five recent clues that suggest the latter:
Equity Put/Call Ratio Flashes Extreme Reading
Jason Goephert of SentimenTrader made the astute observation that equity options traders turned over more puts than calls last week. For the vast majority of trading days, calls option volume far exceeds put volume. However, when the opposite occurs, it’s worth noting. Over the past 25 years, similar readings (put turnover exceeding call turnover) have led to a higher two-month S&P 500 return in 26 out of 29 instances.
Image Source: SentimenTrader
New Highs are Exceeding New Lows
The New High-to-Low indicator measures the number of 52-week highs minus the number of 52-week lows in the market. New highs exceeding new lows are crucial for a sustained bull market because they reflect positive market breadth and broad-based strength. When the number of stocks reaching new highs outpaces those hitting new lows, it indicates widespread optimism and confidence among investors. This breadth suggests that the overall market is participating in the upward trend rather than being driven solely by a few high-performing stocks. For months, new lows have exceeded new highs, however; in the past few sessions, the trend has completely reversed.
Image Source: StockCharts.com
Stocks Retake Key Moving Averages
Because stocks tend to trend, moving averages are essential for investors to follow. Investor Jonah Lupton points out, “Just a couple weeks ago we had less than 14% of stocks in the S&P 500 Index ETF ((SPY - Free Report) ), Nasdaq 100 ETF ((QQQ - Free Report) ), and Russell 2000 Index ((IWM - Free Report) ) above their 50-day moving average. Now we have 67% of SPY, 72% of QQQ, and 61% of IWM above their 50-day moving average.”
Small Caps Explode on Massive Volume
On November 14th, the Russell 2000 index soared by 5.5% in volume more than double the norm. The magnitude of the price move coupled with heavy volume indicates a market that has bottomed and is being fueled by heavy institutional accumulation.
Image Source: TradingView
Inflation is Tamed
Earlier this week, a Bank of America ((BAC - Free Report) ) analyst wrote, “We now think the hiking cycle is over after a benign CPI report. The Fed will probably try to leave the door open for more hikes next year at its December meeting, but there are diminishing returns to hawkish rhetoric when its policy choice leans dovish. We think that it would take a meaningful re-acceleration in inflation for the Fed to hike next year.” The CME FedWatch Tool echoes this sentiment and gives it a 99.7% chance the Fed will not hike for the remainder of 2023. As the old Wall Street adage warns, “Don’t fight the fed!”
Image Source: Chicago Mercantile Exchange